In Re: Banks v. Gill Dist. Centers

• Decision Date: 15 August 2001
• Docket Number: No. 00-55339,00-55339
• Citation: 263 F.3d 862
• Parties: (9th Cir. 2001) IN RE: THOMAS M. BANKS, DEBTOR. THOMAS M. BANKS, APPELLANT v. GILL DISTRIBUTION CENTERS, INC., OPINION RONALD RICHARDSON; TRANSWORLD DISTRIBUTION SERVICES, INC. DBA RICHARDSON WAREHOUSE COMPANY, APPELLEES
• Court: U.S. Court of Appeals — Ninth Circuit

Page 862

263 F.3d 862 (9th Cir. 2001)

IN RE: THOMAS M. BANKS, DEBTOR. THOMAS M. BANKS, APPELLANT v. GILL DISTRIBUTION CENTERS, INC., OPINION RONALD RICHARDSON; TRANSWORLD DISTRIBUTION SERVICES, INC. DBA RICHARDSON WAREHOUSE COMPANY, APPELLEES

No. 00-55339

UNITED STATES COURT OF APPEALS FOR THE NINTH CIRCUIT

Argued and Submitted May 10, 2001

Filed August 15, 2001

[Copyrighted Material Omitted]

Steven L. Hogan (argued), Erik M. Kowalewsky, Lurie & Zepeda, Beverly Hills, California; Stephen F. Biegenzahn, Joel B. Weinberg, Biegenzahn Weinberg, Woodland Hills, California, for appellant Thomas M. Banks.

E.T. O'Farrell, Riverside, California, for appellees Ronald Richardson, Transworld Distribution Services, Inc., dba Richardson Warehouse Company.

Phillip K. Fife (argued), Seal Beach, California, for appellee Gill Distribution Centers, Inc.

Appeal from the Ninth Circuit Bankruptcy Appellate Panel Klein, Montali, and Brandt, Bankruptcy Judges, Presiding BAP No. CC-98-1750-KMOB

Before: M. Margaret McKeown and Raymond C. Fisher, Circuit Judges, and David Warner Hagen,¹ District Judge.

Hagen, District Judge

I. Introduction

Thomas M. Banks ("Banks") appeals from a judgment of the United States Bankruptcy Court for the Central District of California which was affirmed by the Bankruptcy Appellate Panel for the Ninth Circuit ("BAP"). Banks, a lawyer, asks us to reverse the decision of the BAP on the grounds that (1) all claims asserted against him by Gill Distribution Centers, Inc. ("Gill"), and Ronald Richardson ("Richardson") are barred by the statute of limitations, and (2), even were those claims not time barred, they are dischargeable. We are asked to decide whether the bankruptcy court erred in the following: (1) by concluding the statute of limitations had not expired as to Gill's and Richardson's claims; (2) by holding that Banks's debt to Richardson was non-dischargeable under 11 U.S.C. §§ 523(a)(4); (3) by holding Banks's debt to Gill was non-dischargeable under 11 U.S.C. §§ 523(a)(6); and (4) by awarding prejudgment interest at the California state rate of 10 percent instead of the lower federal rate of 5.413 percent.

II. Factual Background

This case stems from Banks's misappropriation of the proceeds of litigation involving Gill, Pirelli Tire Corporation ("Pirelli"), Richardson, Port Warehouse Corporation ("Port"), Transworld Distribution Services, Inc., a.k.a. Richardson Warehouse Company ("Transworld"), and Banks.

In January, 1980, Transworld hired Banks, a lawyer, to prepare documents for Transworld's sale to Gill of its warehousing business and Transworld's sublease to Gill of a warehouse Transworld possessed on a sublease from a subsidiary of Pirelli. The transaction closed without permission of the owner of the warehouse, Boston Properties. In May, 1980, Boston Properties sued Transworld, Gill and Pirelli, its master lessee, for forfeiture of lease and unlawful detainer. As a result Gill was evicted.

In March, 1983, Transworld, with Banks as its counsel, sued Pirelli in Los Angeles County Superior Court for lost profits in the form of rent it would have received had Gill not been evicted, and for breach of the implied covenant. Before the suit was filed, Banks and Richardson entered into a retainer agreement by which Banks would represent Transworld, a corporation owned solely by Richardson. This was a contingent fee contract, setting Banks's fee at 33 1/3 percent of all money received by compromise or settlement, or 40 percent of all money received by way of judgment or from settlement reached within 30 days prior to any settlement conference date.

On October 21, 1983, Gill sued various parties, including Richardson, Transworld, Banks, and Pirelli in the Los Angeles County Superior Court. This case was later consolidated with the action filed by Banks in March on behalf of Richardson and Transworld against Pirelli. Shortly before the consolidation of Gill's and Richardson's actions against Pirelli, Gill settled its case with, among others, Banks and Richardson. Banks signed the settlement agreement for himself and as the attorney for Transworld. Richardson signed the settlement agreement for himself and as the president of Transworld.

By the terms of the settlement agreement, dated February 20, 1988, Richardson assigned to Gill 40 percent of any recovery it might obtain from Pirelli up to, but not to exceed, $135,000. The settlement agreement also provided that should Richardson obtain a judgment against Pirelli, Gill was entitled to receive any interest that had accrued on Gill's portion of the judgment during an appeal.

Richardson won its case in state court against Pirelli and, on April 17, 1991, the judgment was affirmed on appeal. Pirelli paid $572,247.33 to the order of Banks, who deposited it in his trust account. That sum paid both the judgment ($522,871.73) and the attorney's fees on appeal ($49,375.60). Under the settlement agreement, Gill was to receive $170,648.13 (the capped principal of $135,000 plus interest thereon through April 17, 1991), with the remaining $401,599.20 to be divided between Richardson and Banks pursuant to the contingent fee agreement. Banks, however, never paid Gill. Instead, Banks gave $261,435.86 to Richardson (which was $20,476.35 more than his entitlement) and kept the rest for himself.² This amounted to $310,811.47, or $150,171.78 more than his share.

The bankruptcy court found Banks intended either to negotiate with Gill to pay substantially less than its entitlement of $170,648.33, or to forestall payment long enough for the statute of limitations to run, leaving Gill with neither the money nor the legal recourse to obtain it.

On April 14, 1995, Gill sued Richardson, Transworld, Port, Banks and Pirelli in state court for breach of the settlement agreement. The suit was timely under California's four year statute of limitations. Cal. Civ. Proc. Code §§ 337(1) (1998). A year later, while the case was still pending, Banks filed a petition under chapter 7 of the Bankruptcy Code. Gill and Richardson promptly filed nondischargeability actions in bankruptcy court against Banks alleging fraud, breach of fiduciary duty, and willful and malicious injury.³ Gill had not included fraud as an allegation in its state court breach of contract complaint and Banks argued at the dischargeability trial that Gill was precluded from obtaining a fraud determination in the bankruptcy court because California's statute of limitations for fraud actions (three years from discovery, Cal. Civ. Proc. Code §§ 338(d) (1998)) had expired pre-petition.

The bankruptcy court held: (1) there was no consensual agreement between Banks and Richardson to increase the debtor's attorney fees from 40 to 50 percent of the recovery; (2) Banks's attorney fees were to be calculated from Transworld's recovery after Gill's share had been deducted per the settlement agreement; (3) Transworld's acceptance of 50 percent of the recovery did not estop it from disputing the alleged fee increase initiated by the debtor; (4) the complaints to determine the dischargeability of debt filed by Gill and Richardson were timely filed under Rule 4007; (5) Gill need not have pled causes of action predicated on §§ 523(a) in state court in order to keep them alive in a bankruptcy proceeding; (6) Banks was liable to Gill for wilful and malicious injury, which liability is non-dischargeable pursuant to§§ 523(a)(6); (7) Banks was liable to Transworld and Richardson for breach of fiduciary duty, which liability is non-dischargeable pursuant to §§ 523(a)(4); and, (8) in the alternative, Banks was liable to Transworld and Richardson for indemnification in the amount either pays Gill in excess of $35,382.18. ⁴ See Gill Distribution Ctrs., Inc. v. Banks (In re Banks), 225 B.R. 738, 749 (Bankr. C.D. Cal. 1998).

Concerning the statute of limitations, the bankruptcy court held "that a debt upon which the state statute of limitations for fraud, breach of fiduciary duty, etc. has run prior to the filing of the bankruptcy case has been `established' pre-petition if the creditor has taken a timely affirmative act which is necessary to the creditor's ability to collect the debt in a manner provided for by law." Id. at 745. The bankruptcy court stated further that "[t]o find otherwise, the court would risk holding the creditor hostage to the debtor's choice of timing as to the filing of the bankruptcy petition." Id. The bankruptcy court found that Bankruptcy Rule 4007 governed the timeliness of bankruptcy petitions. See id. at 746.

Finally, the bankruptcy court awarded prejudgment interest to Gill and Richardson at the California state interest rate of 10 percent, rather than the federal interest rate of 5.413 percent. See id. at 750. Relying on Mutuelles Unies v. Kroll & Linstrom, 957 F.2d 707, 714 (9th Cir. 1992), the court held that Gill was entitled to California's 10 percent prejudgment interest rate against Richardson on his breach of contract claim. To avoid inequities the bankruptcy court also applied the 10 percent interest rate in each of the other judgments. See id.

The BAP affirmed the bankruptcy court's ruling, except to reverse in part Richardson's judgment against Banks in order to provide a subrogation feature between Richardson and Gill.

III. Standard of Review

The decisions of the BAP are reviewed de novo . See DeMassa v. MacIntyre (In re MacIntyre), 74 F.3d 186, 187 (9th Cir. 1996). In reviewing decisions of the bankruptcy court, legal conclusions are reviewed de novo , factual determinations are reviewed for clear error, and mixed questions of law and fact are reviewed de novo. See Murray v. Bammer (In re Bammer), 131 F.3d 788, 792 (9th Cir. 1997).

IV. Analysis

A. Statute of Limitations

Banks contends the bankruptcy court erred in holding that Lee-Benner v. Gergely (In re Gergely), 110 F.3d 1448 (9th Cir. 1997), and Resolution Trust Corp. v. McKendry (In re McKendry), 40 F.3d 331 (10th Cir. 1...